AI-Driven Data Center Upgrades and Growth Potential
CREDO presents several key elements for enhancing AI-focused data centers. Meanwhile, ARM’s A-Optimized Designs and new chip production endeavors could foster sustained growth.
While neither stock is particularly cheap, both are worthy of a premium rating.
The AI market has expanded tremendously in the last decade. This surge, fueled by advanced cloud services and innovative AI applications, has ignited significant interest in various high-growth tech stocks.
NVIDIA stands out as the leading producer of discrete GPUs for AI tasks, and Microsoft has made sizable investments in OpenAI, integrating its tools into its platforms. But there are lesser-known contenders in the AI growth space that might have even more potential. Let’s consider CREDO Technology and Arm Holdings.
Founded in 2022, CREDO offers a range of speedy connectivity solutions tailored for data centers and the AI sector. Their main products include data transfer chips, digital signal processors, and active electrical cables. From 2022 to 2025, CREDO’s revenue grew at an impressive 60% annually, marking its first profitable year in fiscal 2025.
This growth is largely due to the rapid evolution of cloud and AI markets, prompting major clients to upgrade their data center technologies. Microsoft, believed to be the largest customer, constituted 39% of CREDO’s revenue in 2024. While having a singular focus on one client isn’t ideal, it makes sense considering Microsoft’s ambitions in the cloud and AI fields. Other noteworthy clients include Amazon and Tesla.
Looking ahead, analysts predict revenue for CREDO will continue to rise at a projected 47% annual growth rate from 2025 to 2027, with earnings per share increasing at 113% over the same period. This swift growth could be driven by the ongoing demand for AI tools and a trend towards faster Ethernet connections that require new optical modules. Additionally, there’s a shift towards flexible “chiplet” designs, which may outpace traditional on-chip systems. Although the current price-to-earnings ratio of 64 might seem steep, there could be significant growth opportunities in the coming decades.
On the other hand, ARM—acquired by Japan’s SoftBank in 2016—launched its second IPO in 2023. Its chips are prevalent in smartphones, tablets, and IoT devices. ARM’s designs now support about 99% of global smartphones, largely backed by the efficiency of its A-Optimized ARMV9 designs.
In the fiscal year 2025, ARM’s revenue rose by 24%, with expectations for a 21% growth rate over the next three years. Earnings per share surged by 159% in the same period, with projections suggesting steady growth through fiscal 2028.
ARM initially earned its revenue by licensing its designs to chip manufacturers. However, it recently announced plans to develop its own chips, outsourcing production to Taiwan Semiconductor Manufacturing. This strategic shift will not only heighten operational costs but could also pose competition to major partners. Yet, eliminating royalties may lead to more appealing options for original equipment manufacturers looking to use ARM-based chips.
While ARM’s valuation appears high at 113 times annual revenue, it might still emerge as a strong long-term investment, particularly as the demand for power-efficient AI chips intensifies.
As for CREDO Technology Group, it may be wise to consider various factors before making any investments.
The analysis team from Motley Fool Stock Advisor has identified several stocks believed to be superior buys at this time, omitting Credo Technology Group from their top picks. Investors seeking substantial returns in the coming years might want to explore these other opportunities.
